Joint-leads Citigroup and UBS priced a $225 million convertible for Fubon Financial Holdings last night (Thursday). The deal appeared to find a timely market slot, but has been a long time in the making, having initially been pre-marketed back in early August just as Treasury yields started to spike.
It comes now on the back of a nearly 10% rise in Fubon's share price over the past two days and a settling of the CB market following sizeable transactions for Mega Financial Holdings and China Development Financial Holdings Company (CDFHC) over the past two weeks. Pricing was very similar to both of Fubon's two most recent predecessors, but the syndication process appears to have been smoother.
The 17.5 month deal was priced at the mid-point of its indicative range. Terms were settled at par, with a zero coupon, redemption price of 100.43% and yield of 0.25%. The deal had been marketed with a yield of 0% to 0.5%. There is no put option and a call option after one-and-a-half years with a 130% hurdle.
The conversion premium was set at 24.5% to the stock's NT$34 close, again the mid point of a NT$22 to NT$27 range. There is also a $20 million greenshoe.
Underlying assumptions comprise a bond floor of 95.7%, theoretical value of 100.2% and implied volatility of 26.9%. This is based on a credit spread of 100bp over Libor, dividend pass through, 500bp borrow cost and historic volatility of 26%.
The credit spread assumption is 5bp to 10bp wider than Mega and CDFHC originally priced at. Both have a one notch higher rating than Fubon's triple B and are said to have since tightened a further 5bp to 10bp in the secondary market.
But Fubon has priced with a marginally lower bond floor than Mega's 96.2% and CDFHC's 96.1%. It has also priced through historic volatility and with a theoretical value so close to par, offers investors little chance to extract much value.
As one observer comments, "The volatility is certainly not cheap, but historic volatility levels have come right down, so I think investors probably took the view that they're buying volatility as their low point."
The deal was also undoubtedly helped by the fact that both CDFHC and Mega have bedded down over the past week and are now trading above issue price, with Mega bid yesterday at par and CDFHC at 100.5%. So too, Fubon's stock price performance has recently been underpinned by strong trading activity and most analysts still have a buy recommendation on the stock even though it is above its historic price to book average of 1.5 times.
It is currently quoted at 1.8 times, but is said to be benefiting from the halo effect of its recent acquisition of IBA in Hong Kong, which will give it access to the China market.
And as UBS said in a recent research report, "We believe that sector rotation, a gradual move to bank stocks in the fourth quarter of 2003, will be the key to outperformance."
And it added, "The tech index is up 30% and bank index 2%. Indeed, the valuation gap measured in price to book multiples between the two sectors is rapidly reaching levels not seen since the tech rally in the fourth quarter of 2001."
Books for Fubon's deal are said to have closed five times covered after a three-hour bookbuild. A total of 100 accounts were allocated.
It will clear the holding company of all its remaining treasury shares.